Business, general

How to murder material costs with ABC

Article Abstract:

A case is presented which involves an accounting executive who succeeded in reducing the material cost of his firm's new regulator by 28% with the use of activity-based costing (ABC). The accounting manager was asked by his boss, the Controller, to find a way to lower the high cost of the new regulator. The product's cost was placed at $2,700, $2,000 in direct material and $700 in material overhead. The accountant went to the regulator's project manager to explore ways of cutting the direct material cost, but was told that it could not be done. He then went to the manager of the Production and Material Control to discuss how the cost of material overhead could be reduced, but was also told that it was not possible. Fortunately, the accountant came across an article about ABC and decided to apply it. As a result he was able to lower the direct material cost to $1,600 and the material overhead cost to $350, thus cutting the product's total material cost from $2,700 to just $1,950.

Strategic investment appraisal

Article Abstract:

Many organizations are refusing to invest in advanced manufacturing technology (AMT) because immediate results are not evident, but the evaluation of AMT investments can be performed effectively through an informal evaluation of strategic benefits and a quantitative analysis. The objective is to determine the benefits of AMT in terms of short-term incremental cash flows, as well as long-run strategies. AMT investment can improve product quality, diversification strategy, and risk reduction. The most common benefits in AMT appraisal are cost savings and increased control of production systems. A strategic planning matrix, which measures strategies and benefits, can aid in investment appraisal.